The UKTPO exists to provide independent and objective advice on the economics and law of Brexit and trade policy. The question of whether to hold a ‘second’ referendum is essentially a political one. However, how to organise such a referendum is a technical question on which economists have something to offer.

Given the divisions in the country it seems plausible to argue that any referendum should offer three alternatives:

For example, Professor Vernon Bogdanor suggests a two-stage referendum in which we ask first whether people want to leave and then, a week or so later, what form leave should take. Professor Meg Russell, in an excellent contribution to the Today Programme today (17th December 2018; at 2.39:50) characterised this as ‘difficult’, because how you vote in the first round is influenced by your hopes or expectations of the outcome of the second.

Professor Russell is quite correct – Professor Bogdanor’s ordering replicates the fundamental problem with the first referendum: no-one would know what ‘leave’ entailed. However, if we simply reversed the order of the questions, this problem would be avoided. Hence, on the assumption that the details of each option had been properly explained, I recommend a two-round referendum with:

Round 1: ”IF we leave the EU, would you prefer ‘no deal’ or ‘Mrs May’s deal’?”

Then, when the answer to this is known (say a week later),

Round 2 asks “Now you know how we would leave, would you prefer leaving or staying?”

The decision that would face the UK public in a referendum is sequential – the step of leaving inevitably precedes the step of implementing post-leave arrangements. Economists have long understood that the way to make optimal decisions in such circumstances is through a process known as ‘backward induction’. You start with what will be the last step of the actual process (which of the forms of ‘leave’ you prefer) and work backwards to determine whether the best of the leave options is better than remaining. So, in the first step, the UK electorate determines whether it would prefer no deal to Mrs May’s deal, and then knowing what it will get from leave, whether it wants to go down that path at all.

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The Brexit Withdrawal Agreement and the Political Declaration are being presented as a means to end the uncertainty about the UK’s future relationship with Europe. But in an explainer for the ESRC’s UK in a Changing Europe, Professor L Alan Winters argues that this is not the case. Uncertainty will continue regardless of what happens to the Withdrawal Agreement.

Briefly, he argues that, if the Withdrawal Agreement is approved by Parliament and the EU:

The backstop it mandates requires a customs union between the UK and the EU and that most EU regulations for goods will apply in Northern Ireland. However, there is no regulatory alignment between the rest of the UK and the EU and so, if the backstop came into operation, there would be border formalities both in the Irish Sea and as UK goods entered the EU via any other route.

Negotiating a trade agreement with the EU will take a lot longer than the 21 months allowed for it in the Withdrawal Agreement, not least because every EU member state has a veto over trade agreements.

The Political Declaration that defines the parameters for that negotiation is imprecise in critical places and is, anyway, non-binding.

However, neither would rejecting the Withdrawal Agreement resolve the uncertainty. There is a wide range of possible outcomes all but one of which impose serious economic harm and/or require further negotiation. The option that involves least uncertainty and cost would be to remain within the EU; however, trying to achieve that outcome involves both significant political risks and the risk of ‘no deal’ if the attempt failed.

‘Through a glass, darkly’ is biblical – 1 Corinthians 13:12 – and is interpreted as meaning that we can see only imprecisely and via a mirror, but that, in the end, all will become clear. Seems about the best we can hope for.

L. Alan Winters CB, Professor of Economics and Director of the UK Trade Policy Observatory and Ilona Serwicka is Research Fellow in the economics of Brexit at the Observatory.

Today we are publishing a study of the economic impact of ‘no deal’ and ‘soft’ Brexit scenarios on the 632 Parliamentary constituencies in Great Britain. It shows that calculating the effect of Brexit on the residents in an area gives a very different perspective from the more common calculation based on the jobs in that area.

For example, a ‘no deal’ Brexit would imply a shock equivalent to losing some 42,400 jobs in the parliamentary constituency of Cities of London and Westminster. However, 41,250 of these jobs are held by people who live elsewhere. At the other extreme, Streatham may suffer a loss equivalent to 650 of its jobs, but around 2,250 of Streatham’s residents would lose their employment. (more…)